The economic impact of the Australia–United States free trade agreement

The Australia–United States free trade agreement (AUSFTA) came into effect in 2005. It was the
second preferential trade agreement that Australia signed, after its agreement with Singapore, and
marked a departure from the primacy of Australia’s previous trade policy of unilateral and multilateral
trade liberalisation towards preferential liberalisation. This paper assesses the economic effects of
AUSFTA by applying the Productivity Commission’s gravity model of trade from its Bilateral and
Regional Trade Agreements review. The evidence reveals AUSFTA resulted in a fall in Australian
and US trade with the rest of the world — that the agreement led to trade diversion. Estimates also
show that AUSFTA is associated with a reduction in trade between Australia and the United States.